December 2003

Ever notice how people on both sides of the privatization debate tend to talk in code about whether or not to privatize? Proponents talk about privatization as an opportunity for improved "efficiency" and "lower costs," by which they mean public employees currently performing a particular service are a bunch of stupid, lazy, overpaid, and not-very-well-managed "shovel-leaners." Opponents talk about "public control," "accountability," and "quality," by which they mean private contractors are a bunch of thieving pirates who will seize any and all opportunities to provide the lowest possible level of service at the cheapest cost. How can we decode, and perhaps more importantly defuse, the conversation?

Most governments privatize because of the perceived potential for maintaining or possibly improving services while reducing costs. But we teach our students at Northwestern that, even if the cost-saving case for privatization is compelling, the decision to privatize should depend on a public agency's self-assessment of its ability to do two things. The first is to frame a set of specifications and contract documents which describe the services it wants to purchase completely and unambiguously. The goal: a shared understanding between public agency and contractor of the services to be provided, the conditions and constraints under which they are to be carried out, and the details of compensation arrangements by which they are to be paid for, including any possible penalties or incentive bonuses. The second is to firmly and fairly manage the service contract over its life to ensure the work is carried out as described in the specifications and contract, while dealing equitably with the contractor when unanticipated situations arise during the life of the contract, respecting his/her need to make a profit and stay in business.

We also teach our students that it is delusional for contractors to desire either vague or incomplete specifications of their work during procurement, or lax management and oversight of it by the public agency during execution. Either is a recipe verging on a guarantee for disaster.

If the specs and contract don't describe the work clearly, then the expectations of both contractor and public agency regarding the work to be performed will quickly and inevitably diverge. Disagreements will grow and what should be a mutually-beneficial partnership between contractor and customer will be poisoned. Those who opposed privatization in the first place, who invariably will be closely monitoring the results, will jump at any chance to say, "I told you so," as disputes mount, tempers shorten, and the relationship deteriorates. It is likely in such cases that a judge will eventually be forced to do what the contracting agency should have done in the first place, define the nature of the work to be performed and fair compensation for it.

The same outcome can be expected with lax contract management. Agencies most likely to manage contracts poorly are usually those with little experience in the privatization arena, and contractors who welcome such incompetence are themselves likely to be relative novices. While at first contractors may secretly rejoice over an uninformed or disinterested public agency project manager, they will soon discover the truth in the saying, "Be careful what you ask for; you just might get it." Less-than-thorough project management allows small departures from customer expectations, which could readily be settled if they were surfaced early in the project life, to fester and escalate. Contractors that would benefit greatly in fine-tuning their services from the day-to-day guidance and direction a good project manager provides, instead have to guess at what the contracting agency really wants, whether they are actually providing it, and perhaps most importantly, whether the agency thinks they're providing it.

Sound project management is a two-way street. A project manager who is on top of the game can experience right alongside the contractor the unanticipated conditions and outright problems which inevitably occur in every privatized service contract during its life. He/she is the conduit back to the agency with the news that the contract may need to be changed to reflect such conditions and problems, and serves as the line-of-first-defense judge in recommending if and how such changes should be accomplished. Again, if the project manager is not qualified to or interested in rendering such judgments, then a different kind of judge, this one in a black robe, is likely to have to make the call.

The reason it is critically important to understand and appreciate the essential role of complete and unambiguous project specifications and fair and firm project management is often the same reason governments are anxious to look at privatization in the first place: the fiscal problems plaguing virtually every state and local government in the country. Two of the most popular tools to deal with budget crises, in addition to possible privatization of services, are hiring freezes and early retirement incentive programs. Thus at the very moment when governments find themselves in most need of seasoned and capable managers to write and manage innovative privatization contracts, they find their longest-serving employees, who often but not always are the best positioned to oversee the privatization, opting for early retirement, taking their decades of valuable experience to the fishing hole. And hiring freezes make it difficult to replace them, especially to justify hiring experienced project managers at salaries well above the entry level.

So here's a message that requires no decoding whether you favor or oppose privatization: Your interests are best served by complete and well thought-out contract documents and thorough and competent project management. Only then can you determine whether the decision by a particular government to privatize a particular service is a wise one or not.

David Schulz is Director of the Infrastructure Technology Institute of Northwestern University, where he also serves as an Adjunct Professor of Civil and Environmental Engineering. He came to Northwestern from a quarter century in the public sector including positions as Deputy Public Works Commissioner for the City of Chicago, Budget Director in Chicago and Milwaukee County, and elected Milwaukee County Executive. He can be reached at (847) 491-8165 or at dschulz@northwestern.edu.

Reprinted by permission from the National Council for Public-Private Partnerships. Originally printed in Council Insights, August/September 2003 issue. For more information on NCPPP visit www.ncppp.org.